Decommissioning obligations arise when an entity is required to dismantle or remove an asset at the end of its useful life and to restore the site on which it has been located, for example, when an oil rig or nuclear power station reaches the end of its economic life. Natural disasters – Decommissioning obligations
Rather than allowing an entity to build up a provision for the required costs over the life of the facility, IAS 37 Provisions, Contingent Liabilities and Contingent Assets requires that the liability is recognised as soon as the obligation arises, which will normally be at commencement of operations. Similarly, IAS 16 Property, plant and equipment requires the initial cost of an item of property, plant and equipment to include an estimate of the amount of the costs to dismantle and remove the item and restore the site on which it is located.
IFRIC 1 Changes in Existing Decommissioning, Restoration and Similar Liabilities applies to any decommissioning, restoration or similar liability that has been both included as part of the cost of an asset measured in accordance with IAS 16 and recognised as a liability in accordance with IAS 37. Any new obligations resulting from a natural disaster, other than the existing decommissioning obligations, would not fall into scope of IFRIC 1 and would be recorded as expenses because these relate to new events and not the original decommissioning obligation. A natural disaster can significantly change the timing and amount of the estimated cash flows required to settle the decommissioning, restoration or similar liability. IFRIC 1 addresses how the effect of the following events that change the measurement of an existing decommissioning, restoration or similar liability are accounted for:
A change in the estimated outflow of resources embodying economic benefits (e.g., cash flows) required to settle the obligation.
The adjustment to the liability is recognised in the carrying value of the related asset or in other comprehensive income, depending on whether the asset is measured at cost or revaluation.
If the related asset is measured using the cost model, the change in the liability is added to, or deducted from, the cost of the asset to which it relates. Where the change gives rise to an addition to cost, the entity considers the need to test the new carrying value for impairment. Because of the nature of natural disasters, impairment of any increase in the value of the related asset may be a very real possibility. Conversely, reductions over and above the remaining carrying value of the asset are recognised immediately in profit or loss. The adjusted depreciable amount of the asset is then depreciated prospectively over its remaining useful life.
A change in the current market-based discount rate (this includes changes in the time value of money and the risks specific to the liability).
An increase that reflects the passage of time (also referred to as the unwinding of the discount).
The periodic unwinding of the discount is recognised in profit or loss as a finance cost as it occurs.
Reduction in the economic life of an asset
After a natural disaster, it is determined that a power plant will have to be closed earlier than previously expected. The entity determines that the remaining useful economic life of the asset has reduced from 35 years to 10 years. Natural disasters – Decommissioning obligations
Accordingly, in the absence of other changes, the present value of the decommissioning liability will increase because of the shorter period over which cash flows are discounted (flows). This increase is added to the carrying value of the asset, which is tested for impairment. The remaining carrying value is depreciated prospectively over the following 10 years.
If the related asset is measured using the revaluation model, changes in the liability alter the revaluation surplus or deficit previously recognised for that asset. Changes to the provision are recognised in other comprehensive income and they increase or decrease the value of the revaluation surplus in respect of the asset, except to the extent that:
- A decrease in the provision reverses a previous revaluation deficit on that asset that was recognised in profit or loss
- A decrease in the provision exceeds the carrying amount of the asset that would have been recognised under the cost model
Or Natural disasters – Decommissioning obligations
An increase in the provision exceeds the previous revaluation surplus relating to that asset
in which case, the change is recognised in profit or loss. Changes in the provision might also indicate the need for the asset (and, therefore, all assets in the same class) to be revalued.